Friday, March 04, 2016

How Do Pre-Existing Condition Limitations and Exclusions Work?

A pre-existing condition limitation period or an exclusion is a clause in an insurance contract that an insurance company uses to avoid paying for conditions you had before you were covered under a new policy. Since employees are often confused by how these clauses affect them, I wanted to talk about what pre-existing condition limitations and exclusions are in insurance policies and how they work.

The passage of the Affordable Care Act, which doesn't allow insurance companies to turn people down because of a pre-existing condition for health insurance, has led people to believe that this also prohibited insurance companies from having any pre-existing condition limitations or exclusions in all policies.

But, that's not the case.

The Affordable Care Act only applies to pre-existing conditions related to being approved for a health insurance policy. It doesn't apply to other forms of insurance such as disability income insurance or critical illness insurance which both routinely contain these clauses in their policies. It also doesn't apply to life insurance policies which might be offered at work that require underwriting.

Pre-existing conditions, or "Pre-Exes" as they are called in the insurance business are alive and well in other types of policies.

What this means is that a pre-existing condition can affect whether you are approved for these other types of policies or if you are approved, whether you will receive payment out of a policy on claim related to a pre-existing condition.

Once you are approved for a policy, insurance companies deal with pre-existing conditions in one of two ways. Those are:

  • Pre-Existing Condition Exclusion An exclusion prevents any payment from a policy due to a pre-existing condition. As an example, a critical illness policy I looked at recently listed cancer as one of its covered conditions. However, if you had previously already had cancer, then the policy would never ever pay for cancer if you got cancer again. It would exclude cancer. However, while it might exclude cancer, it might still pay for a heart attack, or any other covered condition, it you never had that condition before (subject to any pre-existing condition limitation).
  • Pre-Existing Condition Limitation A pre-existing condition limitation prevents payment from a policy if a claim due to pre-existing condition if it happens during a certain window of time - like 12 months. An example would be if you a history of heart problems and had a critical illness policy that covered heart attacks and you had a heart attack in the first 12 months - then no payment would be made.

So, a pre-existing condition can either be excluded for the life of the policy or only for a certain period of time.

The Pre-Existing Condition Limitation Look Back Period

Some policies have two components to a pre-existing condition limitation clause. The first component is a look back period. The second component is the length of time the limitation lasts.

A look back period is a period of time before you took out a policy that the insurance company will look back in time at to see if you had a pre-existing condition during that time period. If you didn't have the pre-existing condition during the look back period, but some time before that, then the pre-existing condition limitation would not apply.

In the insurance industry, we toss around these terms all the time. So we might say, hey, what's the pre-ex on this policy. The answer might be - it's a 12/12.

A 12/12 pre-existing condition means that if you have a claim in the first twelve months, the insurance company will look back 12 months before you started the policy to see if you had a pre-existing condition that might have caused it.

A pre-ex is written in the form:

Look back period/Limitation period

You'll find the most common pre-exes are 3/12, 6/6, 6/12 and 12/12.

Should I Buy A Policy That Has A Pre-Ex Clause In It?

A lot of employees when you first tell them about the pre-existing condition limitations or exclusions will often end the discussion there, but that is not always wise. In particular when a guaranteed-issue offer is on the table.

A guaranteed issue policy means there are no medical questions and you can just sign up for the policy. While I'm not a fan of a total exclusion of a pre-existing condition, a limitation period is reasonable and preferred to being declined for a policy.

A limitation period often allows insurance companies to expand the offer to a larger group and reduce or eliminate underwriting requirements which is a good thing.

As long as you understand the pre-ex limitation, if you can get a guaranteed issue offer that limits the time period on claims for pre-existing conditions and you get through the time period, the pre-existing condition limitation no longer applies.

As always, you've got to read your contracts to see exactly what the terms are for the policy you are looking at.

Related Article

Michael is a champion of guaranteed issue for employees in the workplace. He's been an insurance agent since 1992 and has worked with thousands of employees.